Retailers' Online Strategy a More Important Rating Factor - Moody's

Internet sales have reached the point where a retailer’s Internet strategy is more crucial to its success and a more important rating factor, Moody’s Investors Service says in a new report.

A strong online presence is considered a ratings positive more frequently than in the past, because it represents such an important channel of distribution and can mitigate declining comparable-store sales trends.

Maggie Taylor, vice president and senior credit officer, cites as examples Gap Inc. (NYSE: GPS), which in fiscal 2007 mitigated a portion of its 4.0% decline in comparable-store sales with 23.7% growth in online sales to $903 million, and J.C. Penney (NYSE: JCP), which partly compensated for its flat comparable-store sales performance in fiscal 2007, with 15% growth in online sales to $1.5 billion.

The trend continues into 2008, says Moody’s, with direct sales at Limited Brands‘ (NYSE: LTD) Victoria’s Secret unit rising 11% in the first quarter, which partially offset its 8% decline in comparable-store sales.

“Online sales are one of the few bright spots for specialty retailers right now,” says Taylor.

In general, Moody’s expects conditions to continue to induce consumers to spend more over the Internet at the expense of the brick-and-mortar stores. High gasoline prices, for example, should lead to fewer trips to the mall, while improved technology will make sessions on the Internet easier.

The strength of the online channel will benefit retailers that focus solely on the Internet, such as Amazon.com (NASD: AMZN) and retailers that have a sizable online presence, such as Wal-Mart, (NYSE: WMT), J.C. Penney, J.Crew (NYSE: JCG), Neiman Marcus, Macy’s, (NYSE: M) and Limited Brands.

Moody’s says that while investors have long been dazzled by the double-digit growth of online sales, the channel still only accounts for about 4% of retail sales (according to the U.S. Census Bureau). But that percentage has reached finally sufficient mass to be important to many ratings, with the Census Bureau placing sales in 2007 at over $136 billion.

Comments

[argentish]

The problem with online clothing sales is that clothing is one of those things that people like to touch and feel (and try on) before they buy it. I would also worry about the costs associated with returns on online sales. It's difficult to get the size/color/suitability right when buying online. Also, Gap shopping is very much a visit-the-mall experience that cannot be duplicated online.